Gold bullion – is a cycle low imminent?

Gold bullion has declined by over 6% since the end of 2010 in what is probably an overdue correction after a stellar performance (+29,6%) last year. “The yellow metal reached an intraday low of $1,308,25 last week but, with the turmoil in Egypt acting as catalyst, it reversed its course sharply and is now trading at the $1 330 level,” says Dr Prieur du Plessis, chairman of Plexus Asset Management.

“The question is whether we have seen the worst of gold’s decline,” says Du Plessis. He believes that comments regarding cycles from Richard Russell, author of the Dow Theory Letters, are of particular interest.

“Analysts are talking about gold correcting down to 1,200 or even 1,000. However, I believe the gold bull market has much further to go on the upside. I’ve read the McClellan Market report for years. McClellan does a good deal of research on cycles, and some of its cycle studies work out quite well.”

“McClellan discovered that a cycle low appears for gold roughly every 12,5 months. The cycle lows have run as follows: 6 January 2006, 8 January 2007, 7 January 2008, 5 January 2009, 4 January 2010 and 8 January 2011. McClellan puts the next cycle bottom for gold at 8 February 2011, which means it should arrive between now and 8 February, give or take a few weeks before or after that date.”

“Interestingly, the McClellan cycle bottom for gold is due to arrive amid a good deal of professional bearishness regarding gold. Thus many traders have traded out of their gold positions, just as we near the date for the McClellan cycle bottom.”

Du Plessis also refers to a recent King World News interview with James Turk of GoldMoney, a precious metals expert who said: “This little shakeout over the last couple of weeks has done nothing to change the very bullish fundamental factors that have been driving gold and silver higher.Most significantly the Commodities Research Bureau (CRB) Index is at record highs.There is simply too much money being printed around the world and this monetary debasement is behind the ongoing bull market in gold and silver.”

“Although it is difficult to pinpoint short-term bottoms, I believe the gold bull market remains intact, especially with inflation blowing up all around the world,” says Du Plessis. “Meanwhile, China and other Asian countries keep adding gold to their reserves. These purchases should provide a floor to price declines – an ‘Asian put’ so to speak.”

Graph

The red arrows in the chart below mark the McClellan cycle lows:
(Click on image to enlarge)